Disability Insurance

PURPOSE: To state the policy regarding whether work performed by
self-employed persons is substantial gainful activity (SGA) under the
disability provisions of the law. (This Program Policy Statement (PPS)
pertains only to the evaluation of the work activity of self-employed
persons. Social Security Ruling (SSR)
83-33, PPS-107, Determining Whether Work Is Substantial Gainful
Activity -- Employees, deals with the evaluation of work of employees.)

INTRODUCTION: Under the disability provisions of the law, except
within the trial work period (TWP) provisions, a person who is engaging in
SGA is not eligible for payment of disability benefits. SGA is defined in
the regulations as work "that involves doing significant physical or
mental activities . . . [and] is the kind of work usually done for pay or
profit. . . ." "Significant activities" are useful in the operation of a
business and have economic value. Work may be substantial even if it is
performed on a part-time basis, or even if the individual does less, has
less responsibility, or makes less income than in previous work. Work
activity by a self-employed person is gainful if it is the kind of work
usually done for profit, whether or not a profit is realized. Activities
such as self-care, household tasks, unpaid training, hobbies, therapy,
school attendance, clubs, social programs, etc., are not generally
considered to be SGA.

By working, an individual may demonstrate that he or she is, at least
during the time of working, able to engage in SGA. A finding that the
individual did not engage in SGA during a particular period, however, does
not answer the question of the individual's ability to engage in
SGA. To answer this question, it is necessary to consider all the medical
and vocational evidence, of which the work performed after alleged onset
of disability is only a part. The complete evidence may show that the
individual's impairment is less severe than alleged, or that he or she has
the physical, mental and vocational capabilities necessary for SGA.

In determining whether a self-employed individual is engaging in SGA,
consideration must be given to the individual's activities and their value
to his or her business. Self-employment income alone is not a reliable
factor in determining SGA, since it is influenced not only by the
individual's services but also by such things as market conditions,
capital investments, the services of other people, and agreements on
distribution of profits. An individual's services may help build up
capital assets during a period of development when no profits are evident,
or they may reduce losses during temporary periods of poor business
conditions. On the other hand, a person who is incapable of rendering
valuable services may receive a large income solely because of his or her
capital investment in the business. Hence, it is necessary to consider the
economic value of the individual's services, regardless of whether an
immediate income results from such services.

POLICY STATEMENT: SGA determinations for self-employed persons are
based on three tests, all of which must be considered before it can be
established that the self-employed person is not or was not engaged in
SGA. (The application of these tests is discussed in detail later in this
statement.)

With respect to all three tests, it is essential that the evidence show
not only what the individual's activities have been since the alleged date
of disability onset, but also how such activities compare with those he or
she performed before that date. A before-and-after comparison in
development should point up any discrepancies between allegations as to a
reduction in the individual's services and the apparent need of the
business for services of that type. For example, it would not be adequate
to document an alleged decline in the individual's activities after the
alleged onset date without at the same time documenting how this affected
the business and the extent to which supplementation or replacement of the
individual's services was made by other individuals after the alleged date
of onset.

Work in self-employment would not demonstrate the ability to engage in
SGA if, after working a short time (that is, no more than 6 months), the
individual involuntarily discontinued or reduced such work below the SGA
level for reasons relating to his or her impairment. Such an effort would
be identified as an unsuccessful work attempt (UWA). (Regulations sections
404.1575(a) and 416.975(a).)

Evaluation of Work Activity By Self-Employed Persons

NOTE: The following discussion is applicable to nonblind claimants
and beneficiaries under title II and nonblind claimants and recipients
under title XVI for all years, and to blind claimants and beneficiaries
under title II through calendar year 1977. (See section B. in "Evaluation
of Work Activity in Title II Blindness Cases" below concerning work
activity by blind claimants and beneficiaries under title II in 1978 and
later. The SGA tests are not applicable to blind persons under title
XVI.)

A. Test One: Significant Services and Substantial Income

The individual's work activity is SGA if he or she renders services that
are significant to the operation of the business and if he or she receives
a substantial income from the business.

1. Significant Services

a. Self-Employed Persons Other Than Farm Landlords. Self-employed
carpenters, gardeners, handymen, nurses, bookkeepers, consultants, and
people in numerous other one-person business operations may engage in
their trade or profession by themselves, without employees, partners, or
other assistants. The services of an individual in a one-person business
are necessarily "significant." The receipt of substantial income by the
operator of a one-person business will result in a finding of SGA. Where
income is not substantial, SGA may be found on the basis of tests two or
three (the comparability or worth of work tests) as explained in section
B. below.

In a business involving the services of more than one individual, a sole
owner or partner will be found to be rendering significant services if he
or she contributes more than half the total time required for management
of the business, or renders management services for more than 45 hours a
month regardless of the total management time required by the business.
Where the services of a sole owner or partner are significant under either
of these tests, the individual will be found engaged in SGA if he or she
receives substantial income from the business. A sole owner or partner may
also be found engaged in SGA on the basis of tests two or three (the
comparability or worth of work tests) as explained in section B.
below.

b. Farm Landlords. A farm landlord is one who rents farm land to
another person. A farm landlord may be given Social Security earnings
credits if he or she materially participates in the production or
management of the production of the crops or livestock raised on the farm.
(See Regulations No. 4, Subpart K, section 404.1082, for an explanation of
"material participation.") If the services performed by the farm landlord
are considered "material participation" in the activities of the farm,
they will also be considered significant services to the operation of the
business, and the farm landlord will be considered engaged in SGA if he or
she receives substantial income. A farm landlord may also be found engaged
in SGA on the basis of tests two or three (the comparability or worth of
work tests) as explained in section B. below.

The continued existence of an agreement to materially participate, or the
crediting of earnings to the farm landlord's Social Security earnings
record, is not necessarily inconsistent with a substantial reduction or
cessation of significant services by the landlord.

Example:

Mr. S., a materially participating farm landlord, had a stroke in January
but continued to exercise significant managerial authority over the rented
farm through June. On that date he became unable to continue such activity
because of a worsening of the impairment. The agreement of material
participation continued to the end of the year, and Mr. S.'s earnings
record was credited with farm earnings for the entire year. However, since
he stopped providing significant services as a farm landlord as of July 1,
that is the date he was no longer engaging in SGA.

Where a materially participating farm landlord is involved, development
of significant services should generally be limited to whether the
individual is personally performing the same services which were the basis
for the finding of material participation. Additional development
concerning the extent of services being rendered will be necessary only
where the individual's services are alleged to have changed significantly
since the alleged date of disability onset, or where the finding of
material participation was not based solely on the individual's services
but also on the services of an agent of that individual.

For taxable years beginning after December 31, 1973, the activities of an
agent are not considered in determining whether a landlord or tenant is
materially participating in the management or operation of a farm. If an
agent is involved, the agent's activities must be distinguished from those
of the landlord or tenant. Only the latter are to be considered in
determining whether the test of material participation is met. The income
derived from the activities of the agent is rental income and does not
count as income from self-employment.

2. Substantial Income. A self-employed individual will have
substantial income from a business if "countable income" (see subsection
b.(1) for discussion of the term "countable income") from the business
averages more per month than the amount shown for the particular calendar
year in the SGA Earnings Guidelines presented below. Even if "countable
income" from the business does not average more than the applicable amount
shown in the Guidelines, a self-employed individual will have substantial
income from a business if the livelihood which he or she derives from the
business is comparable to that which he or she had before becoming
disabled, or is comparable to that of unimpaired self-employed
individuals in his or her community engaged in the same or similar
businesses as their means of livelihood.

a. SGA Earnings Guidelines and Effective Dates Based on Year of Work
Activity.[1]

(1) Blind and Nonblind Individuals

Year(s)

"Countable Income" is substantial if it averages more per month than the
amount of:

1975 and before

$200

1976

230

1977

240

(2) Nonblind Individuals Only

Year(s)

"Countable Income" is substantial if it averages more per month than the
amount of:

1978

$260

1979

280

1980 and after

300

(3) Blind Individuals Only

Year(s)

"Countable Income" is substantial if it averages more per month than the
amount of:

1978

$334

1979

375

1980

417

1981

459

1982

500

1983

550

b. Determining Whether "Countable Income" Averages More Per Month Than
the Amount Shown in the Earnings Guidelines.

(1) Determining "Countable Income." The SGA Earnings Guidelines
are a basis for evaluating whether an individual engaged in SGA.
Evaluation of a self-employed person's work activity for SGA purposes is
concerned with only that income which represents the person's own
productivity. Therefore, before applying the Earnings Guidelines, it is
necessary to ascertain what portion of the individual's income represents
the actual value of the work he or she performed. To do so, the
adjudicator must first determine the individual's net income (i.e., gross
income less normal business expenses). Once net income is determined, it
is necessary to deduct the value of any significant amount of unpaid help
furnished the self-employed person by a spouse, children, or others;
impairment-related work expenses (IRWE) (if not already deducted from
gross income as a business expense); unincurred business expenses paid for
the self-employed person by another individual or agency; and soil bank
payments if they were included as farm income. (An amount reported under
the optional method (see Regulations No. 4, section 404.1094) is not the
actual net income, nor is it reported as such for purposes of Federal
income tax. Therefore, a copy of the tax return should be obtained for any
year in which the actual net income is pertinent.) The portion of the
individual's income remaining after the applicable deductions represents
the actual value of work performed. This is the amount which is counted
for purposes of determining the issue of SGA and is, therefore, compared
to the Earnings Guidelines. For ease of reference in this PPS, it is
called "countable income."

Unpaid Help: The reasonable monetary value of any significant
amount of unpaid help furnished by a spouse, children, or others should be
deducted from net income. The file should include facts which would permit
an estimate of the reasonable value of unpaid help furnished by family
members or others. When it is clear that the help rendered consists of
miscellaneous duties carried on in connection with the person's general
activities as a member of the household or as a friend, statement to this
effect will be sufficient, and no estimate of value will be necessary
(e.g., a farmer's children feed a small flock of chickens or tend a home
garden). On the other hand, where the help furnished is of a nature to
which commercial value would ordinarily be assigned, the following type of
information should be in the file: the name of the helping individual and
this person's relationship to the impaired self-employed individual; the
reason why unpaid help was furnished; a full account of the services
rendered, the amount of time furnished, and how long the arrangement
existed; an estimate of the reasonable value of the services, on the basis
of prevailing pay for that type of work in the community; and, if the help
was furnished by a spouse or by a child under age 18, an explanation of
how the previous pattern of such individual's activities was affected, if
at all.

In estimating the amount to be deducted for unpaid help, it is necessary
to consider the prevailing wage rate in the community for similar
services. Where the unpaid help is rendered on a part-time or intermittent
basis, only the pro rata value attributable to the services actually
performed (as compared with those that a full-time employee would perform)
should be deducted.

EXAMPLE:

Mr. J., a former automobile mechanic, became disabled as a result of an
accident. Through the services of a rehabilitation agency, he opened a
candy and cigarette counter in January 1982 in the lobby of an office
building. He ran the business as a self-employed individual and was able
to serve customers, make change, and perform the various other duties
connected with the business. However, once a day, he needed help in
restocking the shelves. Mr. W., an elevator operator in the same building,
donated an hour of his time each day, without pay, to perform this service
for the claimant. In estimating the amount to be deducted from net income,
the prevailing local rate of $3.25 an hour for this type of help was used.
Hence, although Mr. J.'s net reportable income for income tax purposes was
$3,900 a year (or an average of $325 a month), his income was found not
substantial because the deduction of approximately $65 per month for
unpaid help resulted in "countable income" which was not more than $300
per month for 1982; and, development established that Mr. J.'s livelihood
from the vending stand was not comparable either to his own past personal
standard of livelihood or to the community standard of livelihood as
explained in subsection 2.c. below.

Impairment-Related Work Expenses. IRWE paid before December 1,
1980, are deductible in determining "countable income" only to the extent
that such expenses exceeded what would have been work-related expenses if
the person were not impaired (e.g., the amount by which the use of special
transportation exceeded what the individual, if unimpaired, would have had
to pay for regular transportation to and from work). Expenses paid before
December 1, 1980, for items, e.g., medication or equipment, which the
individual required whether or not he or she worked would not be
deductible.

IRWE paid on or after December 1, 1980, can, however, be deducted from
earnings in determinations as to SGA, regardless of whether these items
and services are also needed for normal daily activities (if not already
deducted from gross income as a business expense). The amount deductible
from earnings is the cost of certain attendant care services, medical
devices, equipment, prostheses, and similar items and services. The costs
of routine drugs and routine medical services are not deductible unless
such drugs and services are necessary to control the disabling condition
so as to enable the individual to work. The amount of IRWE may be deducted
only if the cost is paid by the disabled individual, i.e., the individual
has not been, cannot be, and will not be reimbursed by any source for the
expense; and payments must be within "reasonable limits" and on a monetary
(not an "in-kind") basis. (IRWE will also be deducted from earnings for
the purpose of determining a Supplemental Security Income (SSI)
recipient's monthly payment amount. However, an individual initially
filing for title XVI disability payments who is working and alleges IRWE,
must first meet the SSI income test and qualify for SSI payments without
the deduction of IRWE.)

Unincurred Business Expenses: In the course of doing business, a
disabled self-employed person ordinarily incurs (i.e., becomes liable for)
normal business expenses. These incurred expenses, whether paid by the
self-employed individual or by someone else, are deducted from the
individual's gross income in order to determine net income. In some
instances, however, an individual may be aided in establishing or
sustaining a business by a rehabilitation or other agency or another
person. For example, a sponsoring agency or another person may incur
responsibility for and pay certain business expenses for the disabled
individual (e.g., rent, utilities, purchase and repair of equipment,
etc.). In addition, the individual may be provided with material,
equipment, or stock. In order to determine "countable income" in such
cases, it is necessary to deduct from the individual's net income any
business expenses which were incurred and paid by another person or
agency, as well as the value or the cost of material, equipment or stock
provided. This policy is consistent with the principle that only income
attributable to an individual's own productive work activity should be
considered in determining SGA. It is also analogous to the policy on
unpaid help, discussed above, which makes it possible for a disabled
individual to have a higher income than he or she would ordinarily have by
virtue of his or her own work activity alone.

The following information must be obtained concerning the payment of any
business expenses by someone other than the self-employed individual: the
name of the individual or agency who paid the expenses, and the
relationship of that person or agency to the self-employed individual; the
reason why the expenses were paid; and a full account of the expenses
paid, the kind and amount of expenses, and the period during which they
were paid.

Soil Bank Payments: Certain activities similar in nature to
ordinary farming operations are required of participants in the soil bank
program. However, since these activities are quite limited as compared
with regular farming operations, soil bank payments will not be indicative
of the extent of the management function involved in the total enterprise.
Evidence from the individual should show whether any of his or her farm
income includes soil bank payments, and the extent of such payments,
unless income tax returns for the periods in question contain this
information. If the farmer did include any soil bank payments as income,
those payments should be deducted in determining "countable income" for
SGA purposes.

(2) Determining Average Monthly "Countable Income." With respect
to income under test one, determinations are made in terms of average
monthly income. Thus, if a self-employed person's average monthly
"countable income" exceeds the Earnings Guidelines, he or she will be
found to have substantial income. (See SSR
83-35, PPS-109, Averaging of Earnings in Determining Whether Work Is
Substantial Gainful Activity, for discussion of the policy and procedure
on averaging of income.)

c. Determining Whether a Self-Employed Person's Livelihood Compares
With Personal or Community Standard of Livelihood. If the
self-employed person's average monthly "countable income" does not exceed
the amount shown for the particular calendar year in the Earnings
Guidelines, it is necessary to consider whether his or her livelihood from
the business is comparable to either that which he or she had before
becoming disabled, or to that of unimpaired self-employed persons in the
community engaged in the same or similar businesses as their means of
livelihood.

(1) General Considerations. The experience of the District Office
(DO) is of particular value in determining whether the individual is
deriving, or can be expected to derive, a substantial income from his or
her business. The DO should have included in its determination a
discussion of all the factors considered, so that it will be clear when an
earnings report is not to be taken at face value. It is especially
important that a detailed explanation be given as to the reasons why an
apparently successful business is reported as yielding a
less-than-substantial income. In farm cases, for example, the file should
specifically indicate whether real income in the form of produce is
unreported for taxes because it is being held over for sale in a
succeeding year. On the other hand, a description of special conditions
affecting an individual's business may make it clear why he or she cannot
derive the income ordinarily obtained from an enterprise of that type and
scope. The type of business, amount of gross sales, the markup on products
sold, and expenses such as rent, utilities, transportation, labor costs,
profit shares to employees and partners, etc., are among relevant items to
consider. When the business has been in existence for some time, data
regarding operations in the past (e.g., income tax returns) should be
obtained. The impressions of the DO, based on knowledge of local
conditions obtained in the investigation of earnings credits claimed by
self-employed individuals, will be particularly helpful in determining the
validity of reported income and expenses.

A business from which the individual previously derived a substantial
income may now be expected to yield considerably less as a result of the
curtailment of the individual's work due to the impairment. Development
should show whether the individual has been obliged to cut down the size
of the business, operate the business fewer hours, hire additional labor
to replace the individual's own labor, accept the unpaid help of family
members or others, or enter into a working arrangement so that the duties
and income from the business will now be shared with others.

(2) Personal Standard. If the business was the individual's sole
means of livelihood for a number of years before he or she became
disabled, and the individual continues to receive a comparable livelihood
from it after becoming disabled, his or her income will be considered
substantial. However, in some cases, chronic illness or other special
circumstances existing from some time prior to the individual's becoming
disabled may indicate that his or her financial situation in that period
should not be considered an indication of the individual's standard of
livelihood. Under such circumstances, the community standard of livelihood
would be a more pertinent basis for determining whether current and
expected income from the business is substantial.

In some businesses, particularly farming, the operator derives a
livelihood despite the fact that cash income is small. Items which do not
lend themselves to precise monetary evaluation, such as homegrown food,
may be a considerable part of the individual's livelihood although not
reportable for Federal income or Social Security tax purposes, and,
therefore, not reflected on the earnings record. In the case of a farmer,
although a monetary evaluation of such commodities is not controlling, the
commodities should be considered in determining whether the yield from the
farm is comparable to personal or community standards of livelihood.

(3) Community Standard. Meeting the community standard of
livelihood will be a sufficient basis for finding substantial income,
regardless of the individual's economic circumstances prior to becoming
disabled. However, in determining the community standard for similar
businesses, exclude from consideration those individuals who are for
various reasons considered unrepresentative, e.g., where chronic illness
accounts for a low level of income.

(4) Developing Personal or Community Standard of Livelihood. The
self-employed individual should be questioned concerning the source and
amount of his or her livelihood over a number of years (generally not less
than 5 years) prior to becoming disabled. Where the individual's personal
standard of livelihood is not met or the information furnished is
inconclusive as to his or her personal standard of livelihood, it will be
necessary to obtain evidence regarding the community standard of
livelihood for businesses of a similar nature. In some cases, the DO's own
observations and knowledge will be sufficient. In others, evidence will be
needed from the local Chamber of Commerce or other informed sources.

B. Tests Two and Three: Comparability of Work and Worth of
Work.

1. General. If it is clearly established that the self-employed
person is not engaging in SGA on the basis of significant services and
substantial income, both the second and third SGA tests concerning
comparability and worth of work must be considered. According to these
tests, the individual will be engaged in SGA if evidence clearly
demonstrates that:

a. The individual's work activity, in terms of all relevant factors such
as hours, skills, energy output, efficiency, duties, and responsibilities,
is comparable to that of unimpaired individuals in the same community
engaged in the same or similar businesses as their means of livelihood;
or

b. The individual's work activity, although not comparable to that of
unimpaired individuals as indicated above, is, nevertheless, clearly worth
more than the amount shown for the particular calendar year in the SGA
Earnings Guidelines when considered in terms of its value to the business,
or when compared to the salary an owner would pay to an employee for such
duties in that business setting.

2. Development of Comparability and Worth of Work Activity. When
the impaired individual operates a business at a level comparable to that
of unimpaired individuals in the community who make their livelihood from
the same or similar kind of business, there can be a finding of SGA by the
impaired person. To establish comparability of work activity, it is
necessary to show that the disabled person is performing at a level
comparable to that of unimpaired persons, considering the following
factors: hours, skills, energy output, efficiency, duties and
responsibilities. The lack of conclusive evidence as to the comparability
of the required factors will result in a finding that work performed is
not SGA.

An important part of the comparison is the selection of the group of
unimpaired persons. The type of self-employment must be the same. In
addition, the unimpaired persons must maintain on the basis of their
activity a standard of living regarded as adequate for a particular
community. Well-established businesses are generally the most reasonable
choice for comparison.

Development must be specific. Each work factor cited above must be
described in detail, showing its contribution to the business operation.
General descriptions are considered inconclusive evidence for the
point-by-point comparison that is required. If only a general description
is possible or available, any doubt as to the comparability of the factors
should be resolved in favor of the impaired individual.

Evidence of the impaired individual's activities accompanied by a
statement that the work is comparable to the work of unimpaired persons is
insufficient for a sound decision. If necessary, a description should be
obtained through a personal interview with an unimpaired self-employed
individual from the selected group. It may be necessary to have a more
comprehensive description of the impaired individual's activity than that
which can be provided by the impaired person. Contact, therefore, should
be made with people having firsthand knowledge of the impaired
individual's work situation obtained through actual participation or
observation.

With respect to tests two and three, the degree to which evidence of
comparability or worth of services should contain data supplied by outside
authorities (e.g., county agents, etc.) will depend on the factual
situation. In many instances, familiarity with local conditions will make
it unnecessary to document the file in great detail. For example, it may
be evident in a poor farming area that management services on a small farm
yielding a less-than-subsistence income would not be comparable to the
full range of physical and mental activities performed by an able-bodied
farm operator, nor would the services be clearly worth more than the
amount shown for the particular calendar year in the SGA Earnings
Guidelines. On the other hand, where there is any doubt as to the
comparability or worth of services, it will be necessary to obtain
evidence in appropriate detail, supplemented as required by opinions from
authoritative sources in the community.

NOTE: The following discussion is applicable to blind claimants
and beneficiaries under title II. Section B below highlights those changes
applicable to work activity by blind individuals in 1978 and later.

A. Self-Employment Before 1978.

For work activity performed before 1978 by blind self-employed persons
under title II, the principles of evaluation and the income considered
sufficient to show an ability to do SGA are the same as those for other
self-employed individuals. (See the preceding section on "Evaluation of
Work Activity by Self-Employed Persons.")

B. Self-Employment in 1978 or Later.

For evaluation of work activity performed in 1978 or later by blind
self-employed persons under title II, there is an SGA earnings amount for
each year that is higher than the SGA primary earnings amount for nonblind
persons; there is no secondary amount for blind individuals. Specific
amounts (as shown in the SGA Earnings Guidelines) have been established
for years 1978 through 1982. After 1982, any increases in the SGA earnings
amount for blind persons depend on increases in the retirement test exempt
amount applicable to beneficiaries who have attained age 65.

Prior to application of the Earnings Guidelines for a determination as to
SGA, the blind individual's self-employment income should be evaluated in
the same manner as that of nonblind individuals in order to determine
"countable income." That is, it is necessary to deduct from net income the
reasonable value of any significant amount of unpaid help, IRWE if they
were not already deducted from gross income as a business expense;
unincurred business expenses; and any soil bank payments if such payments
were included as income by a farmer.

The self-employment activity of blind persons in 1978 or later should be
evaluated only in terms of the dollar amounts shown in the SGA Earnings
Guidelines. It should not be evaluated in terms of the tests of
comparability and worth of work discussed in subsection B of the above
section on "Evaluation of Work Activity by Self-Employed Persons."

EFFECTIVE DATE: The policy explained herein is effective as of the
date of publication of this PPS.

[1] SGA monthly guideline
amounts have been published in the Social Security regulations and are
increased periodically to conform generally to increases in wages and
salaries. With respect to blind individuals, the SGA Earnings Guidelines
apply to blind persons under title II but not to blind individuals under
title XVI because they are not subject to any SGA tests. Effective 1978,
due to a change in the law, statutorily blind persons under title II
became subject to SGA guideline amounts higher than those applicable to
nonblind persons.

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